“Is the money we have saved for our child’s education protected or not?”
This is a frequently asked question by parents considering filing for bankruptcy protection. Obviously these parents don’t want to risk their child’s education fund. Saving for college is hard. Congress made it easier with Section 529 (named after the provision that created them) qualified tuition programs which allow a family to put money aside for children’s college expenses in a tax-favored way.
Normally, all property in a bankruptcy case is either sold for creditors or protected under bankruptcy law for the debtor’s benefit. Congress, however, decided to protect 529 plans in some respect. After the 2005 bankruptcy law changes, 529 accounts may be exempt (protected) or may not, depending on when the contribution was made to the account. A Kansas bankruptcy court in In re Michael D. and Alice A. Werth has stated that “both the state and federal statutes exempt long-term planning and savings for post-secondary education expenses, but neither provide for 529 accounts to be a pre-bankruptcy planning safe haven for assets otherwise available to pay creditors.” The Court excluded 529 account contributions made within one year preceding a bankruptcy filing from a general exemption for post-secondary savings accounts.
This ruling has been followed in numerous other Bankruptcy Courts. The lesson here is that contributions made to a 529 account are exempt as long as they are made at least one year prior to the filing of bankruptcy. To ensure your rights and the rights of your children and their education fund are protected, please contact our office and speak to one of our experienced attorneys before filing bankruptcy!